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Euribor – Short Sterling Sep 2012 spread

Nicole Elliott from Mizuho Corporate Bank at 11/19/09


Comment: For over two years now investors and the money market have been wearing rose-tinted spectacles, anticipating economic recovery by the summer, eagerly spotting more and more swallows. For this reason red and green contract months have had a tendency to rally as time marches on, and hopes are dashed. At the moment we see no reason to change this view and shall allow for rates to stay ultra-low for a very long time. (Investors ought to look at the chart of the front month Euroyen contract between 2001 and 2006 for what can happen in extremis.) Current futures contracts will therefore be dragged towards 100.00, the only question being which one moves faster and which gets closer. Since summer 2007 the spread above has traded around a mean at 84 basis points, holding within one standard deviation (46 and 121) most of the time. Having topped with an irregular ‘head-and-shoulders’ early August the spread should narrow to 50 basis points over the coming months. This is the measured target from the pattern and 61% Fibonacci retracement as well as the lower deviation.

A sustained break above 130 forces us to review.

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